Governors Reject State Bankruptcy Option

Governors today slammed talk of federal action to allow states to declare bankruptcy and said the idea would ultimately do more harm than good.

“Suggestions have been brought forward and some speculation that states are teetering on the brink of bankruptcy. I’m here to say I believe that’s a dangerous development,” Utah Gov. Gary Herbert said at a panel on the state of public finance at the National Governors Association winter meeting. “It has risks to our municipal markets, to those who invest in our states wondering about the economic viability of our states. This is coming from incomplete and in many times inaccurate information.”

Herbert, who chairs the NGA’s Economic Development and Commerce Committee, went on to say that Congressional talk about a state bankruptcy option “brings uncertainty to the marketplace and causes a potential increase in interest rates. It rattles investors and will raise the cost of state government and create more volatility in the financial markets.”

Congress has held several hearings on the possibility of allowing states to declare bankruptcy, which, proponents argue, would help cash-strapped states get back on track by relieving them of debt. Influential Republicans, including Newt Gingrich and Jeb Bush, have suggested bankruptcy would give states the option to reorganize their finances and free themselves from union obligations.

“In such a reorganization, a state could propose to terminate some, all or none of its government employee union contracts and establish new compensation rates, work rules, etc,” Bush and Gingrich wrote in a Los Angeles Times op-ed last month. “The lucrative pay and benefits packages that government employee unions have received from obliging politicians over the years are perhaps the most significant hurdles for many states trying to restore fiscal health.”

Governors at the NGA conference today strongly disagreed.

“The reality for all of us is this whole conversation about bankruptcy has chilled some of the economic development conversation,” North Carolina Gov. Bev Perdue said.

“These are dangerous times that we live in when we have people fueling things that really can hurt our states’ economic bases. Bankruptcy … is simply not an option that any governor would ever pursue,” she said.

Financial experts on the panel tried to reassure governors that the bankruptcy option will not become a reality.

“We don’t believe that’s going to happen,” Thomas Doe, founder and CEO of Municipal Market Advisors said. “If you maintain that strong position … that strong voice, then I think we’re in really good shape.”